The Puerto Rico Fiscal Oversight Board is on a tight deadline to draft a recovery plan that will put the island back on its financial feet, avoid further defaults, and pave the way for a sustainable economic future. The Board is currently slated to unveil its Fiscal and Economic Growth Plan (FEGP) in time to meet a self-imposed deadline of January 31, curiously proximate to the expiration of PROMESA unilateral stay on creditor litigation that expires on February 15 unless extended by the Board. For his part, newly elected Governor Ricky Rossello has formally asked the board for an extension on this deadline.
As things stand, the deadline puts the new administration, which took office on January 2, in a nearly impossible predicament. Governor Rossello has just over three weeks to work with the Board in completing a fiscal plan, giving his administration practically no time to seriously examine the island’s finances and craft any sort of detailed reform strategy. The absence of such a plan threatens to deal a major blow to the government’s ability to conduct serious negotiations with creditors, which–in the absence of such–will be based on the approved FEGP, which goes against Congress’s stated goal in passing PROMESA in the first place. It will also throw a serious wrench into Governor Rossello’s reform agenda, which he has already pursued aggressively by putting forth a number of legislative measures.
The governor’s herculean task is made all the more difficult by a couple of critical unknown variables that will significantly impact the island’s finances, which makes it even more difficult for the Oversight Board to plan effectively.
One of these unknown variables is a tax deal that allows the U.S. Treasury to provide Puerto Rico with up to 20 percent of its revenue by allowing multinational manufacturers to credit taxes paid in Puerto Rico against federal taxes. Governor Rossello will certainly seek to get this extended on the island, but any such extension can’t come before the January 31st deadline.
Another area of uncertainty is Puerto Rico’s health care expenses. Reimbursement rates for doctors serving Medicaid patients on the island are significantly lower than on the mainland, sometimes by as much as 70 percent. This is a major shortfall given that 60 percent of Puerto Ricans get their health care either through Medicare or Medicaid. To make up for the difference, the federal government provides block grants to the commonwealth, which have to be periodically renewed. The latest one expires in 2017, and if Congress fails to renew it another $1.8 billion will be added to Puerto Rico’s liabilities. The board has decided that the island’s government cannot factor these payments into its calculations for future revenues until there is a firm indication that they will continue.
Because of all these uncertainties, the governor formally asked the board for an extension of these deadlines on his first day in office, and it seems obvious that it is in the long-term best interest of every stakeholder for the board to grant it so that the government may construct its long-run plan with more certainty as to its revenue.
The board should also rethink its decision to retain several consultants of the former Puerto Rican Government and even Treasury Department officials as consultants. Continued collaboration with US Treasury’s Kent Hiteshew, the hiring of ex-Treasury officials Luyen Tran and Adam Chepenik, and the board’s insinuations that it will continue working with Garcia Padilla Administration advisors Cleary Gottlieb and Millstein and Company is troubling. In addition to their history of obfuscating consensual dialogue, they have all spent much of the last year singularly focused on creating a false crisis narrative in an effort to accelerate pension payments ahead of creditors. In their world, forced debt restructuring is the solution rather than fiscal responsibility.
In fact, their early efforts to politicize the crisis is a key reason that Congress passed legislation and installed a politically neutral Oversight Board in the first place. Retaining these individuals, despite PROMESA’s clear intent to take this process out of their hands, handicaps Governor Rossello—who campaigned on a platform of change from the previous administration—and casts significant doubt on any hope for successful negotiations with creditors.
Puerto Rico needs flexibility and new ideas to get out of its economic malaise. By granting Governor Rossello’s request for an extension, or at the very least making the FEGP a working document capable of accommodating changing circumstances, the Board creates a modicum of breathing room while reducing the board’s need to turn to Treasury department retreads and the potential problems they bring to the process, and giving it time to rethink them entirely. Best of all, it would reassure investors that the path forward is to be one of serious reform, not a repeat of the Padilla administration’s foolhardy push into a quagmire of debt and default.
Ike Brannon is president of Capital Policy Analytics, a consulting firm in Washington.
